Debt restructuring refers to the reallocation of resources or change in the terms of loan extension to enable the debtor to pay back the loan to his or her creditor. Debt restructuring is an adjustment made by both the debtor and the creditor to smooth out temporary difficulties in the way of loan repayment. Debt restructuring is of two types, and there are many ways to carry out the restructuring process.
Debt Restructuring: Types
Debt restructuring is of two kinds, depending on the terms and the cost to the debtor.
1) General Debt Restructuring
Under the terms of general debt restructuring, the creditor incurs no losses from the process. This happens when the creditor decides to extend the loan period, or lowers the interest rate, to enable the debtor to tide over temporary financial difficulty and pay the debt later.
2) Troubled Debt Restructuring
Troubled debt restructuring refers to the process where the creditor incurs losses in the process. This happens when the Debt Restructuring leads to reduction in the accrued interest, or due to the dip in the value of the collateral, or through conversions to equity.
How to Plan Debt Restructuring:
1) The crediting company should prepare a roadmap for the debt restructuring process. The strategy should include the expected time to be taken to recover the debts, the terms of loan repayment, and watching the financial performance of the debtor.
2) The decision of the financial institution regarding Debt Restructuring depends on whether the debtor has invested in the company, holds shares with the company, or is a subsidiary of the company.
3) If there is conflict within the company’s board of directors regarding the process, then it is advisable to ask for help from a third party. However, third party mediation is not needed if the debtor is a subsidiary of the company.
4) Making a cash flow projection is also important to the Debt Restructuring process. It is advisable not to include uncertain cash flow estimates in the plan.
5) The debtor’s financial situation should also be considered while making a Debt Restructuring plan. The debtor’s ability to repay the loan depends on his or her financial management, so the financial company needs to look into the debtor’s roadmap for repaying the loan. If the debtor is another company, then changing the key people associated with it, like the director, board of directors or chairperson might help.
If you are planning to go for Debt Restructuring, as a creditor or borrower, you can approach a small business consultant for help.
Debt restructuring depends on many factors like the debtor’s financial management, the projected cash inflow, the relation between the debtor and the creditor etc. Debt Restructuring is meant to help both the parties. It involves compromises made by the creditor as well as the debtor to ensure that the loan is repaid in full to the creditor without too much of a financial loss to the debtor.
Alexander Gordon is a writer for http://www.smallbusinessconsulting.com –